What are debits and credits - JustAnswer



What are debits and credits? How do debits and credits affect the accounting equation? Are debits always increases? Are credits always decreases? Why or why not? I would like you to think of a financial transaction in your organization and determine what the debits and credits would be.

Debits are a component of an accounting transaction that will increase assets and decrease liabilities and equity.  Credits are a component of an accounting transaction that will increase liabilities and equity and decrease assets.

In double entry accounting, rather than using a single column for each account and entering some numbers as positive and others as negative, we use two columns for each account and enter only positive numbers. Whether the entry increases or decreases the account is determined by choice of the column in which it is entered. Entries in the left column are referred to as debits, and entries in the right column are referred to as credits.

Two accounts always are affected by each transaction, and one of those entries must be a debit and the other must be a credit of equal amount. Actually, more than two accounts can be used if the transaction is spread among them, just as long as the sum of debits for the transaction equals the sum of credits for it.

The double entry accounting system provides a system of checks and balances. By summing up all of the debits and summing up all of the credits and comparing the two totals, one can detect and have the opportunity to correct many common types of bookkeeping errors.

To avoid confusion over debits and credits, avoid thinking of them in the way that they are used in everyday language, which often refers to a credit as increasing an account and a debit as decreasing an account. The reason for the apparent inconsistency when comparing everyday language to accounting language is that from the bank customer's perspective, a checking account is an asset account. From the bank's perspective, the customer's account appears on the balance sheet as a liability account, and a liability account's balance is increased by crediting it. In common use, we use the terminology from the perspective of the bank's books, hence the apparent inconsistency

Accounting is so powerful because it is all based off of one simple accounting equation:

Assets-Liabilities-Stockholder's Equity = 0

Assets = Liabilities + Stockholder's Equity

Stockholder's Equity = Assets - Liabilities

Liabilities = Asset - Stockholder's Equity

All of these are one simple equation. They are a bunch of different variations, to say the same thing. They are always in balance, always able to provide information. The accounting equation is able to provide tons of information. By breaking this equation out further, Accountants, Financial analysts and Banks come up with more complex ways to evaluate a company. For instance assets can be broken into current assets and long term assets. By doing this, there is a greater ability to evaluate key financial measure like liquidity. Liquidity ratios answer a simple question, "Does X Company have enough money to pay the bills? This is: "A simple and vital question to answer”.

Debit and credits ensure that the equation is always in balance. They are just two opposites that offset each other when on the same side of the equation. Debit and credit always equal each other. This creates a balance of the equation. They allow the parts of the equation to change but the result to be the same, zero.

Zero serves the function of a check figure. A credit always offset a debit creating no net affect. That is it. The numbers change but the balance remains. This is how we keep track of the changes occurring in our business's financial picture.

Whether a debit or a credit increases or decreases an account balance depends on the type of account. Asset and expense accounts are increased on the debit side, and liability, equity, and revenue accounts are increased on the credit side.

It is just necessary to remember one thing. In accounting, the verbs "debit" and "credit" have the following meanings

|Debit |Credit |

|Enter in the left column |Enter in the right column |

Debit refers to the left column; credit refers to the right column. To debit the cash account simply means to enter the value in the left column of the cash account. There are no deeper meanings with which to be concerned

In a typical business transaction we get something and we give up something. Examples of Financial transaction in an organization:

• Sale-Sell goods and/or services

o Cash Sale-customer pays at the time of sale

The business gets cash or a check from their customer and gives up a product or service to their customer.

o Here, as the business gets cash, Cash A/c which is an asset a/c is increased on the debit side.

Accounts Used:

Debit: Cash   

Credit: Sales

• Purchase goods and/or services

o Cash Purchase-business pays the supplier at the time of purchase

The business gets a product or service from their supplier and gives up cash or a check to their supplier.

o Here, as the cash is given up, Cash a/c which is an Asset a/c is decreased on the Credit side.

Accounts Used:

Debit: Expense

Credit: Cash

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